Why the change in Spain and Italy will unsettle the EU

It was a coincidence that both Spain and Italy agreed new leaders within hours of each other on June 1. The new Prime Ministers were sworn in on the back of very different crises. In Italy, it came almost three months after elections that produced shock victories for the extremist populist parties. In Spain it came quickly after the Socialist Party opposition successfully tapped outrage over a Supreme Court ruling that convicted former members of the governing People Party. But the consequences of both could lead to the same result: instability across the European Union, in particular in the Eurozone.

Italy is the biggest risk. As the eighth or ninth largest economy in the world, and the third in the Eurozone, any drastic changes could have a major ripple effect. The new government is not simply a switch from traditional centre-left party to traditional centre-right, or vice-versa, as is usually the case. It is a coalition of two wildly anti-establishment parties: the far-right, anti-immigrant League and the nominally radical left Five Star Movement. They are both populist and have both expressed hostility to the euro.

The two upstart parties chose law professor Giuseppe Conte as the new Prime Minister. He has no political experience, and his lack of a party base is expected to weaken his authority. Five Star leader Luigi Di Maio and League leader Matteo Salvini will serve as Deputy Prime Ministers in his cabinet.

The government could have been installed a week earlier, had it not been for a revealing crisis. Salvini wanted as Finance Minister a virulently anti-euro economist, Paolo Savona, who had previously described the single currency as a “German cage” and written about how to leave it by making the decision over the weekend, so as not to spook markets. He was blocked by Italian President Sergio Mattarella, and so another, less controversial economist, Giovanni Tria, was eventually named as Finance Minister. This incident, at least, shows the coalition is perhaps not as hardline and uncompromising as initially assumed.

There are other big challenges for Italy in its relations with the rest of the EU. The League and Five Star want a budget that both spends more and cuts taxes – which would break Italy’s eurozone deficit criteria. If this provokes a new crisis, it could mean new elections, with Italy’s Euro membership as its theme. While the latest Eurobarometer poll show only 30% of Italians disapprove of the euro – and even 56% of Five Star and 40% of League supporters want to keep it – that could change in a tumultuous political environment.

A further issue concerns Russia: both parties want to defy their western European allies by calling for an end to sanctions on Moscow. In his inaugural speech on June 5, Conte said he was proud to be a populist, later adding leaving the euro “is not a goal we want to pursue.”

Spain’s new leader is Pedro Sánchez, who was is the seventh Prime Minister of the country’s democratic era. Like Conte, Sánchez is a former professor, but in economics. He led the Socialist Party against Prime Minister Mariano Rajoy in 2015, lost and resigned, only to re-claim the leadership a year ago. He successfully exploited the crisis surrounding the People’s Party by persuading the Catalan and Basques separatists supporting Rajoy to switch sides – the first time since Spain’s constitution was adopted 40 years ago that a Prime Minister has been removed through a no-confidence vote.

Spain is the Eurozone’s fourth-biggest economy. In 2012 it was – along with Italy, Portugal and Greece – part of a wider Eurozone crisis, as government borrowing costs surged to levels that might have led to default.

But unlike Italy, Spain took painful decisions during the crisis to reform and readjust. Its economy has grown by almost 14% over the past five years, while Italy’s has grown just 6%. And Spain has not been as roiled as Italy from the migration crisis that first erupted in 2015: the EU’s reluctance to help Italy cope has fuelled both anti-European and anti-migrant sentiment. By contrast, popular support for the EU remains strong in Spain, and all of Spain’s main parties are solidly pro-European, unlike in Italy.

Sánchez himself has not given much indication of what his government will do, but he committed to keep Spain’s commitments to its European partners in terms of fiscal stability – upholding Rajoy’s recent 2018 budget – and to lead a firmly pro-European government. And Sánchez has shrewdly named as his Economy Minister one of the European Commission’s top officials, Nadia Calviño, the Director-General for Budget – an appointment that sends a message of economic stability to both the markets and to Brussels.

He has also named two other top EU officials to his government: Josep Borrell, the former European Parliament President, is now Foreign Affairs, EU and Cooperation Minister (his title has changed from Foreign Minister); and Luis Planas, the Secretary General of European Economic and Social Committee (EESC) is the Agriculture Minister.

But Sánchez is still weak: his party has just 84 members in the 350-seat parliament chamber, less than a quarter. His unlikely coalition includes proven unreliable partners: radical Podemos is the strongest rival to the Socialists on the left, while the Catalan separatists last year triggered Spain’s biggest political crisis in decades with their independence bid.

His government could stay in power until 2020, when a general election must be called, but Sánchez is expected to will wait until his party is in better shape before calling one. However, with the second chamber in the Spanish Parliament still under the control of the absolute majority by the People’s Party, no new legislation is expected to be adopted.

So, different countries, different circumstances, but still factors for instability, even if markets reacted positively when both Italy and Spain announced their new governments.

The EU has to consider its response too. European Council President Donald Tusk was cautious when he sent his congratulatory letters to the new prime ministers. He told Sánchez that he expected Spain “to play a constructive role in the European Union,” but he told Conte that “our community will only flourish when based on respectful dialogue and loyal cooperation”.

The Commission has been less diplomatic. EU Budget Commissioner Gunther Oettinger clumsily warned last month that financial markets would “send a signal” to Italian voters about right way to vote next time, and Commission President, Jean-Claude Juncker said that Italians need more “hard work” and “less corruption” (although he later hailed “Italy’s place at the heart of Europe and of the euro.”). While Italy’s slow growth has little to do with Eurozone fiscal rules, the EU should hold back from any lecturing, as it could reinforce stereotypes about interfering Brussels bureaucrats.

It is fate that the new governments in Italy and Spain were agreed on the same day. But there is a clear message from their transitions: the political shockwaves from the economic and financial crisis are lasting longer than expected. Both countries are going through periods of political instability. And that ought to be a wake-up call for the EU: it cannot keep ducking the tough political and economic questions gnawing at it.

By Miguel Ferré

Miguel Ferré is a Senior Advisor at Burson-Marsteller. He was the Secretary of State in the Spanish Ministry of Finance and Public Administration during some of the most difficult periods.

 

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